All posts tagged Finland

What happens to the European Financial Stability Facility if France loses its triple-A rating?

Credit-rating agencies have warned that Belgium faces a downgrade after picking up the brunt of the bill for Dexia’s rescue. France, which is also contributing to the €90 billion in guarantees backing Dexia, is said to be safe from a downgrade. So far.

But Dexia isn’t the only banking headache facing France. Its banking industry more generally has heavy exposure to Greece and other peripherals. Although the burden of sovereign debt they carry isn’t quite on a par with the load that caused Dexia to flounder, defaults across peripheral Europe would prompt a serious recapitalization of the industry. The degree to which the French government would back its banks is the degree to which its credit rating would suffer.

And that’s potentially a problem for Europe’s rescue fund, the EFSF. In order to raise the cheap funding needed to rescue Greece and other flagging European sovereigns, the EFSF relies on a triple-A rating. And to maintain that triple-A rating, the EFSF needs to be backed by the euro-zone’s triple-A-rated governments: Germany, France, Finland, Austria, the Netherlands and Luxembourg. France’s portion is a bit more than a fifth of the EFSF total.

A ratings cut for France would lead to one for the EFSF unless the remaining triple-A-rated countries picked up more of the burden. But that leads to its own problems.

The Greek government is saying that the country has taken about as much austerity as it can stand.

“It’s killing us,” says one Greek cabinet minister.

Athens can’t force through another round cuts to pay pensions and social services: “An angry population will take matters into its own hands, the government will collapse and we may end up with political crisis in a near-bankrupt euro-zone country which nobody will know how to control.”

The suspension of talks between Greece and its creditors Friday highlights the Greek dilemma. Slow economic growth and increased budget deficits move the European Union, European Central Bank and the International Monetary Fund—the “troika”—to demand still more cuts to cover the gap. The Greeks see that as a recipe for a protracted recession, chronic deficits and an unhappy population.

Prime Minister George Papandreou has upped the ante, telling his finance minister last night to say “no” to demands for another €1.7 billion in cuts and taxes to shrink the 2011 budget deficit to its targeted 7.6% to 7.9% of GDP.

Insiders are certain some kind of compromise will be hammered out by the time the talks resume in 10 days. Without troika approval, the creditors won’t release an €8 billion loan tranche later this month and Greece will go bankrupt in a matter of days—something Athens and the euro zone can least afford. The Greeks are asking for more time to meet targets with existing measures, and not risk extending the country’s recession into a fourth year in 2012 with more cuts.

The problem with the screwball comedy that European crisis management has become is that, after the madcap antics are over, we can’t rely on this movie ultimately ending happily.

Financial markets despair that Europe won’t agree that full fiscal union is the solution to Europe’s debt crisis, which again threatens to spread to the banking system. A second day of collapsing share prices of European banks document deep-rooted fears that even Europe’s healthiest economies can be affected.

Things really began turning bad on Tuesday, when reaction to the meeting between Angela Merkel and Nicolas Sarkozy ranged between disappointment and disbelief. Probably a little unrealistically, investors wanted bold initiatives, maybe a euro-zone bond issuance program to prop up Germany’s poorer neighbors. What they got was a rehashed–and doomed from the start–plan for a financial transaction tax, plus hopelessly undetailed proposals for more economic government.

Even some other euro-zone governments cringed: “It isn’t enough that only two government chiefs meet if there is no added value in their suggestions,” scolded Luxembourg finance minister Luic Frieden.

Some puns are just too hard to resist. Those who don’t like them can blame the one in the headline on a commentator on the Macro Man blog.

But the point is relevant. Last week’s rumors about Greece and the European Union making plans for the country’s withdrawal from the single currency were given credibility by the very fact that alternative measures to revive the Greek economy lack it.

Greece has no way of paying back its load of public debt under current bailout plans. These plans are having to be reconsidered. But the measures likely to be (marginally) palatable to Greece’s northern European creditors won’t do much for Greece. Extending the maturities and reducing the interest rates of Greece’s existing debt will only work if the maturities are pushed so far into the future and the interest rates taken down to such a low level that it halves–or more–the present value of Greek obligations.

But this sort of default will prove a big burden for Greece’s big lenders, not least the European Central Bank. Even with the sort of regulatory fudges that have allowed banks to hide their losses since the start of the financial crisis, it would be impossible for a Greek default big enough to help Greece not to have a big impact on German and French banks’ balance sheets.

Nor is it Greece’s problem alone. Ireland and Portugal are in the same boat.

The problem keeps coming back to the need to distribute these countries’ pain across the European Union. One way or another, if the euro is to be saved, German, French, Dutch and Finnish taxpayers will have to take a hit.

Since the True Finns Party’s historic election result in Finland’s general election on Sunday, a range of Facebook groups have popped up with people expressing their dissatisfaction.

The “No True Finns for Finland” group has so far gathered 49,000 likes, and another called “Election Disappointment” has some 20,000. This compares with only 10,000 likes for the True Finns’ own Facebook page.

Though many Finns are unhappy, they will have to accept their country’s political landscape has changed utterly.

The True Finns’ “victory” was historic in that a political party in Finland has never managed to increase their representation by so much. The party won an additional 34 seats, taking their total to 39, just in a four-year parliamentary period.

This has all happened very quickly, where did they come from?

The True Finns—who are against bailouts for deeply indebted euro-zone countries—won 19% of the vote, adding to the probability that the party could be part of Finland’s new coalition government.

The reasons behind the party’s dramatic increase from the 4.1% they received in the last election in 2007, will most certainly be pondered and discussed in the weeks ahead.

That seems to be the lesson emerging from events at the weekend that have left the direction of most major currencies even less certain than before.

As a result, investors are retiring to the sidelines, seeking solace in currencies that are still supported by the global recovery and likely to continue raising interest rates.

Instead of falling sharply on Sunday’s news that China was tightening its monetary policy, the Australian and New Zealand dollars have remained resilient, suggesting that increased uncertainty elsewhere is working to their benefit.

Although the euro has spent most of this year climbing higher against the dollar on the assumption that the European Central Bank will remain more hawkish than the U.S. Federal Reserve, the single currency has now stalled.

The ECB itself remains as hawkish as ever, with officials suggesting that the rate increase announced the week before last is just the start of a new cycle.

However, an increase in sovereign debt tensions is helping to eclipse the market’s focus on policy, sending the euro lower again.

The success of Finland’s anti-euro party in Sunday’s general elections has sent shivers through financial markets. If the so-called True Finns party has a say in the ruling coalition, it could well block the unanimous vote needed within the euro zone for a Portuguese bail out.

“I’m not a bad person,” says Finnish politician Timo Soini, a populist who could come to block EU efforts to bail out debt-ridden Portugal the way it has aided Greece and Ireland.

“I’m just saying that bailing out these countries is not going to function,” the chairman of the EU-Skeptic True Finns party says.

Since the last election in 2007, he has managed to transform a marginal party into a major political force to be reckoned with ahead of Finland’s general elections on April 17.

As Finland heads to the polls Sunday, a rise in popular support for opposition parties could jeopardize the country’s support for euro zone policies and hamper efforts to approve more sovereign bailouts and stabilize economies in the bloc.

Recent polls suggest the populist True Finns party is gaining traction among the electorate, benefitting from disquiet among voters who remain concerned about Finland’s participation in sovereign bailouts in the euro zone.

In theory, a new Finnish government that is opposed to further bailouts of euro-zone countries could prevent new rescue loans, since they have to be agreed unanimously by all euro members.

The long shadow of acute fiscal embarrassment is uncomfortably close to many developed economies and is already lying very darkly across Greece.

So equity investors might be well advised to look back at past national budget busts, their resolutions and the performance of the stock markets concerned at the time. Analysts at Citigroup certainly think so and have been doing just that…